FAQs on Angel Taxation in India

Q.1 Who is an Angel Investor?

Ans: A person, who contributes funds for a business or enterprises start-up, typically in return for convertible debt or ownership stock, is known as an Angel Investors. Angel investors typically fund start-ups when most investors are not willing to support them and when the chances of the start-ups failing are quite significant.

Q.2 What is Angel Tax?

Ans: Section 56(2) of the Budget Act of 2012 instituted the Angel Tax (viib).

• In general, angel tax is the tax that unlisted companies are required to pay on the money they generate via the issuance of shares.
• Tax is only charged if the investor is an Indian citizen and the share price of issued shares exceeds the company’s fair market value.
• In this case, the surplus value is seen as income and is thereafter considered to be taxed.
• This income falls under the category of “income from other sources.”
• Only investments made by Indian residents are subject to the angel tax.

Q.3 What are the recent amendments on sec 56(2) (viib) after budget 2023?

Ans: Finance Minister Smt. Nirmala Sitaraman recently delivered the Union Budget 2023. Several themes were modified. One of the topics discussed was the angel tax. She has suggested changing Section 56(2)(viib) of the Income Tax Act.

According to the provision, when an unlisted company, such as a start-up, receives equity investment from a resident for the issuance of shares that exceeds the face value of such shares, it will be counted as income for the company and subject to income tax under the heading ‘Income from Other Sources’ for the relevant fiscal year. The Government has recently suggested expanding the scope of the law to include Overseas Investors, which means that any money a start-up receives from a Foreign Investor would now be considered income and subject to taxes.

For example- If a start-up share has a fair market value of Rs 20 per unit and is sold to an investor for Rs 50 during a future fundraising round, the difference of Rs 30 would be taxed as income.

Q.4 Is this section applicable for startups that are registered under DPIIT?

Ans: This section 56(2)(viib) of income tax act is not applicable on startups who are registered under DPIIT. DPIIT is Department for Promotion of Industry and Internal Trade. Its work is to improve the country’s industrial growth by promoting investment in new technologies.